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Osborne must row back from one of the biggest blunders since the war

Our economics editor David Blanchflower takes the Chancellor to task.

I have a candidate for the next chief economist at the Bank of England. Simon Wren-Lewis is an Oxford professor and fellow of Merton College. He began his career as an economist in the Treasury, then moved to the National Institute of Economic and Social Research, where he was head of macroeconomic research. He was also the principal external adviser to the Bank of England on the development of its current and previous core macroeconomic models. Simon has published widely and has all the credentials, in contrast to the current incumbent, Spencer Dale, who has little academic reputation and few publications. Dale’s term is up next year.

This matters because once again the Bank of England’s Monetary Policy Committee, in its May inflation report, was overly optimistic, even though it downgraded its growth forecast. It suggested that growth in 2014 could be as high as 5.5 per cent and ruled out the possibility of zero or negative growth. It claimed that the risks to inflation are balanced and ignored the risks to the downside from the crisis in the eurozone. In my view, the Bank should have done more monetary easing. Indeed, this was confirmed by the International Monetary Fund (IMF) in its latest review of the UK economy on Tuesday 22 May. It said that if monetary stimulus did not work, the UK should introduce a fiscal stimulus involving temporary tax cuts and infrastructure spending, such as I have been advocating.

At a subsequent press conference, Christine Lagarde, the IMF managing director, called on the Bank of England to pump more money into Britain’s flagging economy and to consider a further cut in interest rates to stimulate growth. This is hugely embarrassing for the Chancellor, George Osborne, who can no longer claim that the IMF supports his austerity garbage.

Errors of the era

Something needs to change in the forecasting vaults of the Bank of England. A review of forecasting by David Stockton is welcome but what is needed, above all, is a full examination of why the Bank failed to spot the big one – the worst financial crisis in a century. There are strong grounds for replacing the feeble court of directors, as Andrew Tyrie, the Tory MP and chair of the Treasury select committee, suggests, with a body that would provide proper oversight.

In a recent blog post (, Wren-Lewis argues that the 2010 Budget should rank as one of the UK’s biggest macroeconomic policy errors since the Second World War. I agree with him. “The Conservative Party opposed the government’s counter-cyclical fiscal policy following the recession,” he writes. “They bought the idea of expansionary austerity, which many have pointed out contradicts basic macroeconomic theory in a liquidity trap. There can be no excuse that the right policy was new, untried and radical – the appropriate policy was simple and well understood. When a government chooses to ignore mainstream academic theory and the economy suffers as a result, it has made a major error and it should be held to account for that.”

Wren-Lewis argues that there have been only two errors of similar magnitude in the UK over the past 30 years and both have involved monetary policy. The more recent was the decision in 1990 to enter the European Exchange Rate Mechanism at an overvalued rate of 2.95 Deutschmarks to the pound. The other was the brief adoption of money targeting in the early 1980s. Once again, tightening of policy was required to reduce inflation but the adoption of money targets led to deflation that was both too sharp and uncontrolled. A common feature of all three episodes, he argues, is that they caused increases in unemployment that were unnecessary.

All three of the major errors he identifies were made by Conservative chancellors and derived some of their appeal from simplistic macroeconomics. In 1980, it was the idea that there is a simple and reliable link between some measure of money and inflation. In 1990, it was that the medium-term equilibrium real exchange rate is always equal to the rate of purchasing power parity. And most recently, it was that private-sector demand would automatically replace public-sector demand and/or that monetary policy in the form of inflation targeting is always capable of stabilising demand.

Stuck in the danger zone

The latest data is extremely worrying and suggests that the UK economy might well be at another downward turning point. Of particular concern is the huge drop in Nationwide’s consumer confidence index, which fell by 9 points in April. By contrast, consumer confidence in the US, which has not imposed austerity, rose to the highest level in four years. The Thomson Reuters/University of Michigan sentiment index for May climbed to 77.8 – the highest since January 2008 – from 76.4 the previous month. Inflation is now falling again.

It appears that Osborne has committed a major macro-policy error that has resulted in a flatlining economy. The European Commission’s forecast of what will happen to the debt-to-GDP ratio in the main EU countries (reported in the adjacent table) is particularly interesting. If true, which seems plausible, this would represent for the UK a 19 per cent increase since 2010 (95/80), behind only Spain, Ireland and Portugal. So much for “taking the UK out of the danger zone”.

David Blanchflower is economics editor of the New Statesman

David Blanchflower is economics editor of the New Statesman and professor of economics at Dartmouth College, New Hampshire

This article first appeared in the 28 May 2012 issue of the New Statesman, Who speaks for British Jews?

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Geoffrey Howe dies, aged 88

Howe was Margaret Thatcher's longest serving Cabinet minister – and the man credited with precipitating her downfall.

The former Conservative chancellor Lord Howe, a key figure in the Thatcher government, has died of a suspected heart attack, his family has said. He was 88.

Geoffrey Howe was the longest-serving member of Margaret Thatcher's Cabinet, playing a key role in both her government and her downfall. Born in Port Talbot in 1926, he began his career as a lawyer, and was first elected to parliament in 1964, but lost his seat just 18 months later.

Returning as MP for Reigate in the Conservative election victory of 1970, he served in the government of Edward Heath, first as Solicitor General for England & Wales, then as a Minister of State for Trade. When Margaret Thatcher became opposition leader in 1975, she named Howe as her shadow chancellor.

He retained this brief when the party returned to government in 1979. In the controversial budget of 1981, he outlined a radical monetarist programme, abandoning then-mainstream economic thinking by attempting to rapidly tackle the deficit at a time of recession and unemployment. Following the 1983 election, he was appointed as foreign secretary, in which post he negotiated the return of Hong Kong to China.

In 1989, Thatcher demoted Howe to the position of leader of the house and deputy prime minister. And on 1 November 1990, following disagreements over Britain's relationship with Europe, he resigned from the Cabinet altogether. 

Twelve days later, in a powerful speech explaining his resignation, he attacked the prime minister's attitude to Brussels, and called on his former colleagues to "consider their own response to the tragic conflict of loyalties with which I have myself wrestled for perhaps too long".

Labour Chancellor Denis Healey once described an attack from Howe as "like being savaged by a dead sheep" - but his resignation speech is widely credited for triggering the process that led to Thatcher's downfall. Nine days later, her premiership was over.

Howe retired from the Commons in 1992, and was made a life peer as Baron Howe of Aberavon. He later said that his resignation speech "was not intended as a challenge, it was intended as a way of summarising the importance of Europe". 

Nonetheless, he added: "I am sure that, without [Thatcher's] resignation, we would not have won the 1992 election... If there had been a Labour government from 1992 onwards, New Labour would never have been born."

Jonn Elledge is the editor of the New Statesman's sister site CityMetric. He is on Twitter, far too much, as @JonnElledge.